an analyst observed the following prices for zero coupon equivalent t-bills: 3 year @ 1.9% 4 year @ 2.25% R1 = 3 year spot = 2.1% R2 = 4 year spot = 2.25% The 3 year forward rate US treasury is… ? (the 3 year spot (2.1%) is the rate right now if we want buy a t-bills with a 3-year maturity right? what is the 3 year rate (1.9%) then ?)
I’d go with 7.27% for the 3years forward that is bootstrapping [(1.0225)^4 / (1.019)^1]^1 -1
Shouldn’t it be ( (1.0225)^4 / (1.021)^3 ) - 1 = 2.7%?
. I’m full of bullsh**
kochunni69 is right but what is the difference between 3 year @ 1.9% and R1 = 3 year spot = 2.1% ??
basically, what means R1…?
D’Art, Basically, I don’t know what te followinf are. 3 year @ 1.9% 4 year @ 2.25% But this what I thnk; the question writers throw a lot of numbers at you to confuse you. So take what is required to solve for the answer.
yeah that true. I also beleive that rsat typed it quickly -->the Q is not clear (that is why no one knows what R1 exactly is) also I think u worked out 1f3 where I worked 3f1 thanks for correcting me. good review
i think the put all those figures to confuse us as well. as far as i am concerned, it worked PERFECTLY. thanks guys
I am still confused about the correct solution. Can someone plz post it .
basically there are 2 rates: R1 = 3 year spot = 2.1% R2 = 4 year spot = 2.25% you need the 1 y spot rate in 3 years. Think about it this way: what is the rate you need to compound your 3y FORWARD rate in order to have your 4y FORWARD rate. In other word: (r1^3)(1+the rate you are looking for) = r2^4 >> rate you are looking for = [(r2^4) / (r1^3)] - 1